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Index Wrap, Saturday, 04/16/2005

FREE FALL

by OI Staff

HAVING TROUBLE PRINTING?

THE BOTTOM LINE - Instead of the tone predicted, it was free fall look out below! this past week. I thought that the "market would dip another time or two" and take out the lows. Would this past week qualify as a "DIP"!? - how about a ROUTE! The S&P down 6% and the Nasdaq down 12 percent.

From the Thursday OIN Market Wrap I speculated on: "... another shot down, making new lows ... the retracement of the last advance will be more than the 50 percent that had been completed up through last week. If so, the Dow (INDU) would go to 10,200".

About down 191 pts to close nearer 10,000, at 10,087!!

The Dow overdid it on the upside and now is leading the blue chip sectors down. Nothing magical either about 10,000 on the Dow, as INDU has pierced this level 3 times in the past year.

Hard to have low enough targets when irrational "exuberance" takes over on the downside! Otherwise known, as far back as Charles Dow, as a "panic" type fall. Panic sell offs are a more common pattern in the commodities markets than in stocks. However, the problems had been building for equities.

The initial back-when bearish pattern was the rising "wedge" in the Dow 30 (INDU). Falling wedges are bullish, rising are bearish. The rising pattern suggests future sharp reversals as buying interest is waning. However, the prediction for a possible complete reversal could be hard to believe until this past week. Ultimate objectives in a pattern like this can be back to the starting point of the prior advance.

INDU was leading the last major rally. The bulls managed to get the Industrials to 11,000 again, but it turned out to only be what has been called before a "solitary walk of the Dow"; after all this average is only 30 stocks, bluest of the blue chips (meaning big institutional favorites) and it could be taken up -

When I looked at the broader blue chip S&P 500 (SPX) index, the January to early-March rebound AND its new high seemed to imply that everything was OK with the market. Hey, the bulls said not to worry about the things dragging on the economy and that the earnings growth forecasted was going to continue and keep expanding -

Petty much all the key indices took it on the chin this past week. Not surprising to see the long-time struggling Semiconductor Index (SOX), at its Friday close (382.6), falling to its January low; SOX could be headed to the 360 area again.

The strong small cap teflon-coated Russell 2000 (RUT), a group of stocks both a beacon to and darling of those seeking to do better than the S&P return, took it on the chin, dropping to 580.8 at week's end, well under its 2000 - 2004 double top, putting its big "break out" above this prior major double top into question.

No haven anywhere, not even for the gold bugs! The Philly Gold & Silver Index (XAU) pierced its long-term up trendline and has fallen a sharp 22% from its November peak.

MAJOR STOCK INDEXES - COMMENTARIES/OUTLOOK

S&P 500 Index (SPX) - Daily chart:

I thought that the S&P 500 (SPX) would get down to the 1157 area at least, but was also assuming (dreaming?!) that 1160 in SPX was some kind of support; instead of being sliced through like a knife. The plummet through 1160 with a big corresponding jump in volatility, suggested that my lower envelope line should expand a half percent to its historical 3% under the 21-day moving average where it intersects at 1137 currently (lowest green up arrow) -

Slicing through the August - October up trendline was also quite bearish action, showing buying interest collapsing. The longer a trendline has developed, the stronger the move when it breaks it.

Key resistance is at what we could call the "breakdown" point in the 1165 area. With the chart looking quite bearish now, 1160-1165 is the best near-term rebound potential showing.

A decline to 1120 would fulfill a measured move objective based on how far the first down leg carried. It often carries further than the first down leg. Fibonacci analysis would suggest an eventual objective back to the 1100 area or back to the starting area of the 6-month advance from the October low.

S&P 100 Index (OEX) - Hourly chart:

The decisive downside penetration of the low end of the prior trading range at 556-554 in the S&P 100 (OEX) turned the chart decidedly bearish. If OEX stays around 547, not lower, the decline to date is still within the parameters of a retracement of a prior rally; one that could resume. If downside objectives to 540-536 are met, a longer-term uptrend is in doubt.

I suggest a good profit point to exit puts is in the 540 area. A trade in calls seems favorable to 540-537, risking (just) a few points and looking for rebound potential of 15-17; e.g., from 539 back up to 555.

As I have been saying for some weeks now, I viewed trader "sentiment" as too bullish to suggest that lows in the 556 area were going to be final ones. Intermediate lows tend to come when there is more pessimism about the market's prospects. My Sentiment indicator was saying, about a bottom: NOT YET!

Friday saw a million equities calls and slightly more puts traded to put the ratio into the area associated with bottoms. One-day readings like this tend to precede tradable bottoms by 1 to 5 trading days.

Dow 30 Average (INDU) - Daily chart:

I thought until Friday when things got ugly, that 102 would be a good area to buy DJX calls. 10,200 was the 62% retracement and my thinking was that we were in a more normal correction, not the night of the living dead. Real bearish case is that major buying is not enticed back in unless and until the October lows in the 9750 area are re-tested.

I highlighted a measured move objective on the chart below, which has 9940. This being the level at which the two most recent down swings would be equal. The major indices often see such symmetry. Just about as often, a second down leg is LONGER than the first.

10,000 is NOT a level that I take as significant support by any technical benchmarks. 10,000 has psychological significance aplenty. It's all about what does it take to get the MOST number of people bearish so the SMALLEST number will make money when such a steep sell off and minor panic runs its course and there is a snap back.

A dip under 10,000 such as if it reached 9940, could set the stage for a rebound the next day. If this was Monday it could coincide with my looking for an upside bounce and rally by Tuesday. This for a temporary (only) low; since, it's also true that investors have lost a lot of confidence and traders should be nimble seeking to play a rebound.

Nasdaq Composite (COMP) Index - Daily chart:

I was writing a week ago that I didn't think "the lower trend channel boundary was to be seen (necessarily) as a possible downside objective...but as giving an idea of lowest-low potential under 'normal' market influences."

How about "abnormal" market influences! The Nasdaq Composite (COMP) sure seem headed, and in a HURRY, for the lower end of the downtrend channel highlighted on the chart below -

Once a decline gets below or beyond 62-66 percent of the prior advance, figure that it's now a sign for an eventual "round-trip" back to the prior low. 1897 is a 2/3rds or 66% retracement. 1890 is the intersection of the lower trend channel boundary. The 1897 to 1890 zone becomes an area to watch for a possible interim low.

I could see the Composite getting down to the 1890 area but stopping. Rebound potential I take to be back up to around 1950, at the downside price {price) "gap".

Nasdaq 100 (NDX) Index - Daily:

Last week I noted the most obvious bearish pattern with the Nasdaq 100 (NDX), that of bear flag; outlined by the two parallel (cyan) lines, sloping upward. I also noted a very minimum objective for this pattern, as to 1450. Another way of measuring downside potential (if 1550 was the top of the "flagpole") suggested as low as 1400 as an objective.

I wasn't so bearish as to suspect a straight-line fall to nearly 1400 already. It's almost yesterday that NDX was at 1500! I suppose the lesson is never underestimate the occasional extreme tendency for investors to panic if prices get into such a steep waterfall decline.

Now that the bears are loose and growling for more meat, I have also speculated on the shape of a possible downtrend channel by the highlighted (dashed blue) lines below, with the lower end intersecting currently at 1362. Stay tuned on that. But tech has seemingly gone into free fall for now. The weak get weaker! -

Key resistance once again is much easier to pinpoint than potential "support". Major support is a guess as being at the most significant prior low, and this is all the way back at 1300 in the NDX. There was also the late-September low at 1377.

The most significant technical NDX resistance now is at the prior cluster of lows around 1460; key support, once broken, tends to become key resistance later on.

These big-volume price breaks that start from some line of prior support, also become something like benchmark "breakdown" points; i.e., an area likely to attract heavy selling on a future rebound.

Nasdaq 100 tracking Stock (QQQ) Daily chart:

I anticipated that I would be an interested buyer of QQQQ if it got to 35.5-35.25. But when we opened in the 35.25 area on Friday buyers looked scarcer than snow in July and I wasn't going to be one of them!

As I note on the chart below, the Q's have now retraced more than 2/3rds of its prior advance. This then becomes no longer a "retracement" but begins to look like a return to the last major low.

34.25 is a prior low to look to for buyers to get active, even if only to cover short positions. If the stock declines through 34 there should be another wave of selling as another set of holders of the stock bail. A speculative buy in QQQQ would at 34-34.25 if reached, risking to 33.50, figuring upside potential as back (up) to the breakdown point at $36.

Volume took another healthy jump on Friday, showing the heavy liquidation going on and shorts coming in. If volume had been less on Friday, it would have suggested short-covering going on. The fact that it jumped again suggests further liquidation of long positions. Volume is "confirming" the QQQQ downtrend.

INDEX TRADER - MIDWEEK UPDATES I updated by writing the Thursday Market Wrap this past week - I was bearish, but not bearish enough, after Thursday and after back to back down days of triple digit Dow losses. Who would have thought it would go for a triple! A herd panics, get outta the way!

I'll update my Index Trader column midweek (Wednesday) when my schedule permits and if there is a significant change or adjustment needed to my Sunday commentary.

GOOD DEEDS - Please send any technical and Index-related questions to me at support@optioninvestor.com with 'Leigh Stevens' in the subject line; also, for your question or comment's possible use in my coming week's Trader's Corner article.